Here's Why Costco Appears a Safe Bet Amid Coronavirus Crisis
The rapidly spreading novel coronavirus has claimed innumerable lives, roiled the stock market and brought the economy to standstill. The retail sector, in particular, has been hit hard due to this pandemic. Supply-chain bottlenecks and reduced traffic has led to a number of store closures, which in turn hurt sales and productivity. Moreover, some of the companies are even slashing pays and furloughing employees.
However, even amid such crisis Costco Wholesale Corporation COST looks quite resilient owing to the company’s business model and products it offers, which have been in demand since the outbreak. Notably, shares of this Issaquah, WA-based company have declined a meager 1% in the past three months compared with the industry’s decline of 17.5%. Even the stock has fared far better than the Retail – Wholesale sector and the S&P 500 index that have fallen 15.8% and 23% in the aforementioned period.
A paradigm shift in consumers buying behavior is being noticed due to the pandemic. People are shopping essential items rather than making discretionary purchases. There has been an increased demand for toilet paper, disinfectants, masks, gloves, packaged water, medicines and related food staples.
Certainly, Costco’s growth strategies, better price management, strong membership trends and increasing penetration of e-commerce business have been supporting the performance. Cumulatively, these factors have aided the company in sustaining impressive comparable sales (comps) run. The company witnessed comps growth of 12.1% during the month of February. Management highlighted that results also benefited from an uptick in sales due to coronavirus-led demand spike. This favorably impacted the monthly comps by roughly 3%.
Costco, which shares space with Walmart WMT, Amazon AMZN and Target TGT, has been adopting the omni-channel mantra to provide a seamless shopping experience online and in stores. The company operates e-commerce sites in the United States, Canada, the U.K., Mexico, Korea, Taiwan, Japan and Australia. We note that the company’s e-commerce comparable sales advanced 28.4% in the last reported quarter.
To drive its online sales, the company launched CostcoGrocery to deliver non-perishable items to buyer’s home, and expanded same day grocery delivery service in collaboration with Instacart. Recently, it acquired Innovel Solutions, a leading provider of third-party end-to-end logistics solutions. The buyout will boost Costco’s e-commerce capabilities and facilitate sales of "big and bulky" items.
Costco continues to be one of the dominant warehouse retailers based on the breadth and quality of merchandise offered. In fact, its strategy of selling products at heavily discounted prices has helped it to remain on growth track. Additionally, a differentiated product range enables the company to provide an upscale shopping experience for members.
From aforementioned discussions, it is quite evident that Costco with a Zacks Rank #2 (Buy) and a VGM Score of B appears a safe bet even amid this catastrophe. The company has a trailing four-quarter positive earnings surprise of 3.1%, on average and a long-term earnings growth rate of 8.4%. Moreover, the Zacks Consensus Estimate for its current financial year earnings has improved 1.4% in the past 30 days. We believe that the company’s business model and commitment toward opening membership warehouses will continue to drive traffic. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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